in the middle of the night

In earlier posts, we spoke to the notion that regulators may be forced into rationalizing the biggest banks as banking utilities – essential players in the economy whose future scope of action will be constrained by regulators’ views about what is good for the economy as a whole rather than just the interests of the banks’ shareholders.

Now the fight is on as The New York Times reports that the private equity community is pushing to allow P/E firms to control as well as invest in big banks – a step in the opposite direction.

Bank managements currently work for shareholders with an eye over their shoulders for the regulators. The utility approach would likely require banks to operate more directly in the interests of the economy while they are allowed to earn a “reasonable return on their capital”.

The dilemma – banks need capital and the P/E firms have a lot. But I do not see the Federal Reserve backing down on the shift toward utility status. The economic stakes are too high and bank managements are already too difficult to control before one considers the predilections of the P/E players.

On the other hand, vultures play a useful role in nature – cleaning up messes. And vulture capitalists, er P/E firms, can play a similar role in cleaning up the current economic mess.

Banking utilities are coming, but the Federal Reserve will ultimately wiggle enough to let the P/E guys help clean up the banking system albeit without the unilateral economic control to which they are accustomed.